On January 1, 2016, Grant Company Leased Telephone Equipment from Xu

Essay

On January 1, 2016, Grant Company leased telephone equipment from Xu, Inc. Grant uses straight-line depreciation. The contract requires Grant to pay $5,000 each December 31 for the next three years, at which time the equipment is to be returned to Xu. Using an interest rate of 8%, the present value of the lease payments is $12,885. The following is Grant's January 1, 2016, balance sheet before the lease agreement.
$$\begin{array} { | l | r | r | } \hline \text { Current assets } & & \mathbf { \$ 2 0 , 0 0 0 } \\\hline \text { Equipment } & \mathbf { \$ 2 5 , 0 0 0 } & \\\hline \text { Accumulated depreciatian } & \text { (3,000) } & \mathbf { 2 2 , 0 0 0 } \\\hline \text { Tatal assets } & & \$ 42,000 \\\hline & & \\\hline \text { Liadilities } & & \mathbf { \$ 2 , 0 0 0 } \\\hline \text { Sharehalders' equity } & & \mathbf { 2 2 , 0 0 0 } \\\hline \text { Tatal liadilities and sharehalders' equity } & & \$ 42,000 \\\hline\end{array}$$
Calculate and compare Grant's debt/equity ratios on January 1, 2016, immediately after the lease is signed, as an operating lease and a capital lease.